By Adrian Lawrence FCA
Investors judge the board as closely as the numbers. Adrian Lawrence FCA explains what a credible private company board looks like, and why it pays to build one before the funding conversation starts.
When a private company prepares to raise money, most of the attention goes on the financial model, the pitch deck and the valuation. The board is often an afterthought, something to tidy up once the term sheet arrives.
That is a mistake. Experienced investors look hard at who sits around the boardroom table, how the board works and who holds the management team to account. A board that looks like the founders and their friends tells an investor that oversight will depend on them. A board that already works well tells them the business can be trusted with their capital.
Why the board matters to investors
An investor is backing people as much as a business plan. The board is where those people are held to account: where strategy is set, risks are weighed and performance is challenged. Investors want to know that decisions are made properly, that someone other than the founder can say no, and that the business could cope if a key person left.
Due diligence increasingly reflects this. Investors ask to see board minutes, terms of reference, delegated authorities and conflict registers. Where those barely exist, it raises questions about everything else.
The right size and shape
There is no perfect number, but private company boards tend to work best when they are small enough to make decisions and large enough to bring different perspectives. For a growing business, five to seven directors is a common shape.
A typical structure for a company preparing to raise might include the following.
- The chief executive and usually the finance director, representing management.
- One or two founder or major shareholder directors, where they are not already in executive roles.
- An independent chair, or a clear plan to appoint one, separating leadership of the board from leadership of the business.
- At least one independent non-executive director with no ties to management or shareholders.
- A seat for the incoming investor, which many investors will expect as a condition of their money.
Planning for that investor seat in advance avoids a common problem: a board that grows by one with every funding round until it is too large to function, and is dominated by competing shareholder interests.
Map the skills, not just the seats
A board is more than a list of names. The useful question is what experience the business will need over the next three to five years, and whether the board has it.
Many boards use a simple skills matrix: the capabilities the business needs down one side, the directors across the top, and an honest assessment of who brings what. Typical gaps in growing companies include financial and audit experience, sector knowledge, international expansion, mergers and acquisitions, regulation, and experience of a sale or flotation. The gaps become the brief for the next appointment.
Investors respond well to a board that has done this exercise. It shows the company understands where it is weak and is acting on it, rather than waiting to be told.
Process matters as much as people
Even a well-chosen board can disappoint investors if it is run informally. The basics are not complicated, but they need to be in place before due diligence begins.
That means regular meetings with a clear agenda, board papers circulated in good time, accurate minutes that record decisions and actions, and a schedule of matters reserved for the board so everyone knows which decisions need its approval. As the business grows, committees for audit and for remuneration usually follow, often chaired by independent non-executives.
For larger private companies, the Wates Corporate Governance Principles provide a useful framework for many of these practices. Smaller businesses do not have to follow them, but they are a sensible reference point when designing a board that investors will take seriously.
Start early
The worst time to build a board is in the middle of a funding round. Rushed appointments are rarely the best ones, and investors can usually tell when a director has been added to make the slide deck look better.
Businesses that start twelve to eighteen months ahead have time to agree the shape of the board, find the right people and let them settle in. By the time investors arrive, the new directors have attended several meetings, understand the business and can speak credibly about it. That is far more persuasive than a recent appointment who has barely read the board pack.
Finding the right directors
Most founders start with their own network, and that is often where the problem begins. Advisers, early investors and business friends may bring useful experience, but they rarely bring the independence or the specific skills the board is missing.
A structured private company board search starts with the skills gaps the board has identified, finds people who have served on boards of comparable businesses at a similar stage, and tests both their experience and their independence before any appointment is made. It turns a skills matrix into a shortlist.
A board built for the next stage
A credible board will not rescue a weak business, but a weak board can undermine a strong one. For private companies planning to raise, it is one of the clearest signals of how the business will be run once outside money is in.
Founders who build the board early, around the skills the business will need and with proper processes behind it, go into investor conversations with one less question to answer, and often a better deal as a result.
